Business - India;FMCG companies hedge at commexes to keep costs down

To deal with rising prices of commodities and volatility in the prices of food products, fast moving consumer goods (FMCG) companies are increasingly using the commodities exchanges for hedging to source raw materials. As a part of their strategy to keep margins and profits on the higher side despite downturn in the economy, companies like Dabur and ITC are hedging aggressively in the commodities exchanges for their raw materials supply.
"Our internal team of buyers have accurately predicted the commodity price movement and taken optimal positions in the physical and futures markets," Jude Magima, executive director (supply chain), Dabur India Ltd told FE.
Most of the FMCG companies have been using the platform of two national commodities exchanges - Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) for hedging their supplies of raw materials.
"The companies plan in advance and hedge the price well before the harvest of the product to buffer against adverse price movements," an NCDEX official said.
Apart from hedging for soyabeans in a major way, ITC also hedges coffee along with spices like black pepper and chillies. Dabur hedges commodities like jeera, pepper, edible oils and sugar.
"Our preference is to hedge as far forward as the futures contracts provide the liquidity, because our objective is price risk management for year-long usage of raw material," S Sivakumar, chief executive, agri-business division, ITC said.
FMCG companies of varied product portfolio are into hedging. "Mostly industries from sectors like confectionery, soft drinks, starch products, vegetable oils, hedge in our exchange," the NCDEX offcial added.
Wheat was a popular commodity traded in the commodity exchanges until the government banned futures trading of the commodity for controlling the rising prices. According to NCDEX officials, companies which are into bakery product were mostly involved with securing the wheat contract.
"Wheat futures were very handy as a risk management tool, because farmers sell their wheat in two months after harvest," Sivakumar said.
The agri-business division of ITC sources several agro-commodities through its eChoupals. Sivakumar, while discussing about his company's policy on hedging told FE, "Our preference is to hedge as far forward as the futures contracts provide the liquidity, because our objective is price risk management for year long usage of raw material."
Commodity exchanges are, however unable to track quantity of the commodities traded by the FMCG companies because mostly it is done through members. The quantity involved is also not uniform throughout the spectrum of industries. FMCG companies usually hedge for a part of the output and not the entire output.
Industry sources said that other FMCG companies who are also into hedging include Coke, Pepsi, MDH, and Ruchi group.